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On The Quality Of Cryptocurrency Markets: Centralized Versus Decentralized Exchanges

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  • Andrea Barbon
  • Angelo Ranaldo

Abstract

We analyze the market quality of centralized crypto exchanges (CEXs) and decentralized blockchain-based venues (DEXs) using a unique and comprehensive dataset. Focusing on two fundamental aspects, transaction costs and deviations from the no-arbitrage condition, we estimate the causal effect of ``gas fees'' on DEX market quality. We show that these fixed costs impose a significant burden on relatively small trades and cause persistent arbitrage deviations. Conversely, DEXs offer more competitive transaction costs for larger trades, offering a more favorable environment for institutional investors. Furthermore, we provide causal evidence that innovations aimed at enhancing the flexibility of liquidity provision in DEX markets lead to sizeable improvements in market quality.

Suggested Citation

  • Andrea Barbon & Angelo Ranaldo, 2021. "On The Quality Of Cryptocurrency Markets: Centralized Versus Decentralized Exchanges," Papers 2112.07386, arXiv.org, revised Sep 2024.
    • Handle: RePEc:arx:papers:2112.07386
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    References listed on IDEAS

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    1. Urquhart, Andrew, 2016. "The inefficiency of Bitcoin," Economics Letters, Elsevier, vol. 148(C), pages 80-82.
    2. Makarov, Igor & Schoar, Antoinette, 2020. "Trading and arbitrage in cryptocurrency markets," LSE Research Online Documents on Economics 100409, London School of Economics and Political Science, LSE Library.
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    6. Alex Evans & Guillermo Angeris & Tarun Chitra, 2021. "Optimal Fees for Geometric Mean Market Makers," Papers 2104.00446, arXiv.org.
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    Cited by:

    1. Austin Adams & Benjamin Y Chan & Sarit Markovich & Xin Wan, 2023. "Don't Let MEV Slip: The Costs of Swapping on the Uniswap Protocol," Papers 2309.13648, arXiv.org, revised Apr 2024.
    2. Yutong Quan & Xintong Wu & Wanlin Deng & Luyao Zhang, 2023. "Decoding Social Sentiment in DAO: A Comparative Analysis of Blockchain Governance Communities," Papers 2311.14676, arXiv.org, revised May 2024.
    3. Quan, Yutong & Wu, Xintong & Deng, Wanlin & Zhang, Luyao, 2023. "Decoding Social Sentiment in DAO: A Comparative Analysis of Blockchain Governance Communities," OSF Preprints bq6tu, Center for Open Science.

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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